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Malaysia is one of the fastest growing economies in Southeast Asia, a region that has been characterised in recent history by its impressive economic growth.

 In just the past two decades, the country has gone from a relatively poor, unremarkable economy to a middle income, highly diversified success story.

 Now this by itself is not that unusual these days.

 But to be fair, we are living in one of the most remarkable periods ever in global economic history, as billions of people from across the globe, especially in Asia, are getting access to capital, infrastructure and education that they need to be highly productive members of the global economy.

 What is interesting about Malaysia is how it's made this same progress in a slightly unique way.

 It doesn't necessarily have the manpower to be the next China, but it doesn't want to be.

 It has leveraged other advantages to get where it is today that are arguably more sustainable in the long run.

 If it can continue to capitalise on these factors, it could easily become one of the most influential economies in the region, easily rivaling Japan, South Korea and even China, not even just simply because of its size, but because of another less nominal factor.

 Just look at it.

 In terms of geography, it's probably one of the most fascinating economies in the world, conveniently nestled in between the globe's most active shipping route, split between two major land masses and circling some of the most tense waters on earth.

 For better or worse, Malaysia is probably an economy we are going to start hearing a lot more about in coming years, so as always, there are a few important things to understand.

 What has been behind Malaysia's economic success? What challenges is it going to face as it becomes a fully advanced economy? And finally, what will this growth mean for the region as a whole? Once we've done all of that, we can put Malaysia on the economics explained leaderboard.

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 Before independence, Malaysia was part of a string of colonies known to outsiders as British Malaya.

 Like most of its neighbours, it had been turned into essentially an agrarian commodity supply for the empire, at one point being the largest supplier of tin, rubber and palm oil in the world.

 But after the turbulent changes witnessed during and after the Second World War, coupled with a more than understandable resistance towards colonial rule, Malaysia spent the following two decades fighting for its place in a rapidly developing world.

 In the 1970s as an independent nation, they introduced a new economic policy with an advertised focus on targeting poverty, income inequality and education by strengthening domestic institutions, albeit with a focus on what they did best, exports.

 That said, one of the most important decisions they made was to look outward in an effort to study nearby countries with institutional success and do their best to imitate them.

 Particularly what at the time were known as the Four Asian Tiger Economies, Hong Kong, Singapore, South Korea and Taiwan.

 These were countries that they had once competed with or had sovereignty over but had since outperformed Malaysia's industries.

 This truly marked the start of their journey towards industrialisation with a significant focus towards manufacturing for export.

 Textiles and garments were amongst the first to be developed during this shift, setting up free trade zones in cities like Penang to further promote export growth while enticing others to participate in their development efforts.

 And this is because working alone wouldn't be enough to keep up with a competition, they needed the industrial know-how to put their efforts to good use.

 Malaysia embraced foreign aid, investment and assistance wherever they could find it, primarily with Japan, a veritable goldmine of information given its trade position on the world stage at the time.

 In the automotive industry, companies like Mitsubishi, Honda and Toyota helped set up manufacturing plants.

 Sony, Panasonic and Hitachi helped develop Malaysian electrical and electronics.

 Firms like Renesys helped it become a growing hub for semiconductors and following the foreign direct investment model, Malaysia continued to see considerable GDP growth even after the Asian financial crisis.

 But of course, there are a number of caveats and more on that later.

 The important thing to note is that at the moment, Malaysia is one of those rare cases where governments of the past make long-term economic targets for the future and actually stick to a system that meets most of their goals.

 For example, in an effort to sustain this growth, the country has been good at reinvesting these successes back into developing infrastructure.

 It has some of the best roads, ports and internet in Asia, which has helped to accommodate more industry, so much so that citizen satisfaction in these areas surpasses most wealthier western nations by a significant margin.

 And while geography isn't a cure-all for an economy with some countries practically floating on oil and struggling to capitalize on it in any long-term meaningful way, the Malaysian model has definitely thrived by leveraging its global position strategically.

 It sits at the crossroads of major sea routes like the Strait of Malacca, connecting the Indian Ocean and the South China Sea, which are amongst the busiest shipping lanes in the world for ocean freight.

 About a quarter of the world's trade passes through this channel alone, and it's also a choke point for energy and food imports into China, so the region's largest player can't throw its weight around too much.

 It also doesn't hurt that this location gives Malaysia a time zone advantage.

 The country shares labor windows with major trade partners like China and Singapore, and yet it also starts the day in the middle of critical business hours in parts of the US and Europe.

 It's something that's made the country an incredibly popular trade partner as well as a popular destination for tourists and expats because people can work remotely in the evening and enjoy the low cost of living and lovely environment during the day.

 But of course, this is a give-and-take situation.

 Too many migrants can price locals out of their own cities, but comparatively they are a small group and they are bringing a lot of wealth and opportunities with them, even if it is just jobs providing services for them.

 That's still a good job for someone in a country with a very low cost of living.

 For now, the country has embraced it, offering easy paths to entry for people who want to work remote jobs or operate global businesses digitally from the country.

 A few thousand people every year will take up space displacing locals as they rent out villas to film their buy my course bro ads in, but the trade-off is worth it for the money they can bring in, at least for now.

 This all goes back to one of Malaysia's biggest economic opportunities and threats, purchasing power parity.

 After World War I, economists like Gustav Kassell encouraged a systematic adoption of this adjustment in the face of hyperinflation and instability in order to get a better sense of how genuinely prosperous certain economies were.

 Essentially, purchasing power parity compares different economies' currencies through a basket of goods approach, where the price of the same goods and services is compared across economies to determine the relative power of a dollar.

 For example, a US$50,000 income in Malaysia could afford a very comfortable home, transport, food, entertainment and medical attention, even for a whole family, whereas the same money in the USA would involve making some significant sacrifices.

 It's not measured as much, but purchasing power parity also applies within economies even using the same currency.

 The same $50,000 in the Midwest would be fine to live on, but the same money would be extremely hard to live on in a city like New York or San Francisco.

 Now the trade-off here is that these expensive cities have a lot more services and job opportunities, and the same is generally true for countries where money doesn't go as far.

 Of course, this kind of sounds more complicated than it needs to be.

 All that needs to be understood is that this has helped Malaysia hit above its weight class and improve its economic ranking.

 Malaysia has become such an attractive economy not only because it has a low cost of living, Somalia has a low cost of living, but Malaysia has a low cost of living while still offering all of the modern amenities of a fully developed country and sometimes exceeding them in areas like healthcare.

 Using purchasing power parity GDP versus nominal GDP not only makes Malaysia an attractive place for visitors to settle, it also enhances their influence and attracts more global investment by advertising their low operating costs.

 But there are challenges wrapped up in all of this starting with foreign direct investment.

 While helping Malaysia with growth and credibility, it has some hang-ups when used incorrectly.

 Ironically starting with what got them to this level of prosperity to begin with.

 Again, Malaysia is an export-driven economy and although they've taken advice from partners in the past, they do have a history of depending on innovation coming from the outside instead of innovation for themselves.

 Places like Japan during the tech boom really helped Malaysia stand out as a low cost producer of novel commodities.

 However, as soon as partners change course or stop improving, this leaves the country vulnerable to the possibility of having obsolete manufacturing hubs.

 Advanced products and services require advanced systems.

 Working alongside something like Hitachi Electronics might have been a moneymaker in the 80s and early 90s, but it's been a long time since these respective partnerships have produced anything special and this is starting to appear ever so slightly in Malaysian GDP.

 Even government officials have come out saying the weak external demand is expected to weigh on near-term growth, the economy is facing downside risks stemming from a weaker than expected global growth and deeper or longer than expected technology down cycle, which is just a fancy political way of saying many of our partners slowed down with innovation and we're going to face the same problems or worse because we haven't been creating much on our own.

 And this really makes Malaysia's ascent a bit more complicated.

 Although they've had an impressive run and achieved lower middle income status, there's a possibility, albeit quite slim, they could be trapped there for the foreseeable future without making continual changes.

 Again, one of the things that made the country so attractive to begin with was the not so attractive side of FDI and competitive trade, low cost labour in exchange for global participation.

 But without funding R&D and a steady increase in wages, suddenly other nearby countries could snatch this valuable investment right out of their hands and sometimes they do.

 Again, more on that later.

 And speaking of governance and execution, the 1990s promise for a 2020 self-sufficient Malaysia is one of those goals that hasn't been met.

 With all of Malaysia's regional success, this publicity has done an equally good job of highlighting disparity.

 As stated earlier, Malaysia's new economic policy focused on targeting poverty, income inequality and education by strengthening domestic institutions.

 Although this sort of emits one key detail.

 Primarily that there was also another objective tied to these goals, encouraging more participation of the various ethnic groups that call the country home, which led to quotas for education, employment and business ownership, as well as involvement in commerce, industry and modern agriculture.

 Now, this is economics explained, not civics explained.

 And making efforts to include everyone in the journey to economic prosperity is a noble gesture that often leads to positive results.

 Or at the very least, avoids tensions in a country as culturally diverse as Malaysia is.

 However, critics have made the point that prolonging these policies as long as they have has led to a kind of reverse discrimination, not only affecting elections, but simultaneously creating prioritised domestic classes that may already have the upper hand.

 It's a disparity problem that is pretty pronounced in Peninsula Malaysia versus East Malaysia, which is separate and connected to Indonesia.

 The peninsula is home to the major cities and opportunities, whereas the east is a lot more rural and is at risk of being left behind and the cultural home to many of these groups.

 This isn't an extreme problem at the moment.

 Honestly, the country is a pretty inspiring model of different cultures coming together, but if regional disparities get too severe, public unrest could be added to Malaysia's list of obstacles.

 That said, even with an institutional focus, there is also still a lot of corruption.

 It's not the fairy tale some make it out to be.

 In fact, Malaysia is home to one of the most insane development scandals in modern history, one that, as many of you watching may know, indirectly impacted pop culture in the West.

 In the early 2000s, a businessman worked his way into Malaysia's top level of connected industrial leaders and politicians.

 The way he worked his way up is a fascinating story in and of itself, but the short form is that he eventually won the affection of the Prime Minister, convincing him to set up a sovereign wealth fund to assist in combining regional disparity through development projects called One Malaysia Development Bahad or One MDB.

 Using shell companies to throw off suspicion, he spent the following years spending all of the money invested, with the sole purpose of enhancing Malaysia's quality of life, on lavish parties with US celebrities and other members of the global elite.

 Allegedly, nobody knew about this at the time, but a lot of that same money was also used to make the Wolf of Wall Street.

 How much the government actually knew about this estimated $4 billion US dollar loss is uncertain, but it remains a well-documented stain on the Malaysian government's reputation, and obviously the citizenry is infuriated and embarrassed about the whole ordeal.

 This is much more important than many care to admit.

 One of the most important steps to becoming an advanced economy with advanced businesses is promoting a high-trust society where people are confident in its institutions.

 Malaysia is improving, but it's still hurtle yet to be fully crossed.

 However, it's not all bad news, far from it.

 A few rough patches can't undo all the good Malaysia has done over the last 50 years, and they have a new set of plans or objectives to keep moving forward, specifically their new industrial master plan, or NIMP 2030.

 Currently, there are three key targets, enhancing complexity by focusing on high-tech high-value industries, innovation through research and development while adopting industry 4.

0 tech, whatever that means, and sustainability.

 A main driver to improving the tech industry is the momentum Malaysia has gained with semiconductors.

 There's a lot of mind-numbing science behind why these are becoming increasingly valuable, but the important thing to focus on is that the country is a major global player, accounting for 13% of worldwide testing and packaging.

 They've received billions of dollars and old partners have been replaced by companies like Intel and Infineon, which may not be doing fantastic right now, but are still highly technical operators.

 This also has the additional benefit of helping Malaysia combat the middle-income gap as they push education that aligns with industry needs like STEM fields to prepare a workforce capable of supporting a high-income economy.

 They're also funding programs through this newfound floor foreign direct investment to train tens of thousands of Malaysian engineers to meet industry demand, so it's really a win-win.

 And regarding corruption in the scandalous headlines, it's not exactly perfect, however, they have been making efforts to facilitate trust, especially when it comes to the Malaysian people.

 Between 2019 and 2023, they implemented a program called the National Anti-Corruption Plan, although it has received a fair amount of criticism for lacking measurable results.

 Again, this is still kind of wishful thinking until such programs are actually in use, but this is something that shows more promise than what has been used in the past.

 There's also the common question pertaining to Malaysia's location in Southeast Asia.

 While the country is finding its footing before entering a new phase, will it have to battle with its neighbours like Indonesia, Vietnam or Thailand for the same shrinking pool of outsourced dollars? Well, yes and no.

 It mainly boils down to an edge.

 Malaysia is trailing behind Indonesia in the realm of direct investment, where this gap is only present due to lack of reform and corruption issues.

 Vietnam is close to where Malaysia was in the past, using low-cost labour as an incentive for companies to set up manufacturing in the country, yet if they don't learn from Malaysia's mistakes, they'll likely deal with a similar handful of problems.

 Meanwhile, Singapore obviously stands out amongst all these countries.

 Not because it's cheap, because it isn't, but because it now has a long history of trust when dealing with business affairs.

 All in all, it has less to do with whether or not its neighbour will steal business, and more resembles a healthy rivalry where, when done well, they'll all be better off for it.

 More often than not, members of Asian help each other significantly through close proximity partnerships.

 Vietnam is one of Malaysia's major trade partners sharing everything from palm oil to integrated circuits, and Singapore and Malaysia have special economic zones, not to mention that the former is actually the country's largest source of foreign direct investment.

 Sure, all of these countries might compete for global favour at times, but the fact of the matter is, it's not a zero-sum game where only a few can make it up by pushing others down.

 The only thing standing between Malaysia and lasting economic prosperity is Malaysia.

 Okay, now it's time to put Malaysia on the Economics Explained leaderboard.

 Starting as always with size, Malaysia has a GDP of $488 billion, putting it only slightly behind Vietnam, the Philippines, and Thailand as its closest regional rivals.

 It's also about $100 billion behind Singapore, a city-state which used to be part of the country, and beyond that, in nominal size, it's well behind places like Taiwan, Indonesia, and South Korea.

 It gets a 7 out of 10.

 Now in terms of GDP per capita, it's just crept ahead of the global average of $14,000 per person.

 This also means that while places like Indonesia and Vietnam have larger economies overall, that's also just because they have more people.

 Either way, since it's almost perfectly in line with the global average, it's clearly getting a 5 out of 10.

 Stability and confidence is good by regional standards, which is why it's been able to attract slightly more technical businesses over the years.

 Companies trust Malaysia and its institutions to hold up the rule of law and maintain order, at least enough to trust them with industrial secrets and larger capital investments.

 However, it would be naive not to acknowledge that corruption does still happen, and pretty openly as well.

 It gets a 6 out of 10.

 Growth has been very strong, with the economy roughly doubling in size over the last decade.

 Now that isn't as strong as it was in the early 2000s when the country was rapidly industrialising, but it is still good for a country that is well and truly into global middle income territory.

 It gets a 9 out of 10.

 Finally, Malaysia's exports are quite varied and quite technical.

 Its largest single goods export is integrated circuits, and while they may not be the cutting edge stuff coming out of Taiwan or South Korea, it's still a highly value-adding industry.

 Beyond that, it has a robust service sector, and again, while it may not be world-leading or cutting edge, having an economy where lots of people go to work in an air-conditioned office is normally a sign of things being done well.

 It gets a 7 out of 10.

 Altogether, that gives it an average score of 6.

8 out of 10, putting it into a very respectable position on the leaderboard.

 Now this all lies in stark contrast to the country that arguably gave Malaysia its first boost, Japan.

 We've made an entire video about how their economy has been reacting to a prolonged stagnation, and you should be able to click to that on your screen now.

 Thanks for watching, mate.

 Bye.